Why Boeing Is Still a Buy

by Jonathan Berr | January 24, 2013 10:32 am

Shares of Boeing (NYSE:BA[1]) have barely budged this year, but they’ll take off once the aerospace company wakes up from the regulatory nightmare that has grounded its ultra-modern 787 Dreamliner.

Getting regulators around the world to agree to let the $207 million jet back in the air isn’t going to be easy, nor will it be cheap. Media reports are speculating that it will cost several hundred million dollars. That’s not counting the penalties the company is paying to its airline customers who can’t use their aircraft and the damage to the Boeing brand, which is considerable.

The fiasco may eventually cost Boeing CEO James McNerney his job.

But if Boeing has to oust McNerney, who has been CEO since 2005, to get the Dreamliner back in the air, it’s a small price to pay. The fact that McNerney has kept his job even though the Dreamliner was delivered almost four years behind schedule is nothing short of a miracle. Equally as unbelievable is his 34% raise in 2011, in part because of the first delivery of the 787[2].

Boeing has a deep enough management bench to find a replacement if an ouster happens, which becomes more likely the longer the 787 remains grounded.

Boeing trades a price-to-earnings multiple of about 13, a discount to similar companies such as General Electric  (NYSE:GE[3]) (17) and United Technologies (NYSE:UTX[4]) (18). The average 52-week price target on Boeing is $88.63, about 20% higher than where it currently trades. All told, the rewards of buying the stock far outweigh the risks.

Boeing is the world’s largest planemaker, and the commercial aircraft business is expected to reach “record levels of revenue in 2013, just coming off its best year ever for production in 2012,” according to a report by Deloitte Touche Tohmatsu. It’s also the second-largest defense contractor and a huge builder of satellites and spacecraft, so other forces are also at play with the stock.

Much of the headline risk, however, is from the Dreamliner.

Even Boeing’s harshest critics aren’t suggesting that the Dreamliner will stay grounded forever. Indeed, most airlines are sticking by the Chicago-based company during its hour of need. The reason is simple: The 787 has a big upside potential for them. It’s far more fuel-efficient than conventional aircraft, enabling carriers to fly passengers further, faster and cheaper. For budget-conscious airlines, that’s huge.

The International Air Transport Association says fuel accounts for about 30% of the industry’s operating expenses. Global spending on jet fuel was expected to hit $207 billion in 2012, nearly five times what it was in 2003.

There’s also nothing else quite like the Dreamliner on the market, which is even better news for Boeing. Airbus’ A350, which has some of the same features, isn’t expected to come online until 2014 or 2015. Boeing’s first-mover status, however, will be undermined the longer the 787 remains grounded.

Boeing reportedly has booked orders for about 800 Dreamliners. Once the plane is able to fly again, those numbers should rise as the concerns are eased. That will help Boeing to ramp up production to a sufficient-enough level for the plane to be profitable, which, of course, will give the stock the lift it now lacks.

As of this writing, Jonathan Berr didn’t own securities mentioned here. Follow him on Twitter @jdberr.

  1. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  2. because of the first delivery of the 787: http://money.msn.com/now/post.aspx?post=8b1af6ce-526a-4a1d-81e1-7cce1768763b
  3. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  4. UTX: http://studio-5.financialcontent.com/investplace/quote?Symbol=UTX

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